Taxes, Capital and MBL: Sherman Talks 113th Congress

Acting as primary sponsor for supplemental capital legislation and co-sponsoring every credit union bill that crosses his desk, Congressman Brad Sherman (D-Calif.) has long been a supporter of credit unions.

Credit Union Times recently spoke with him about the 113th Congress, and what the new Capitol Hill group will mean for credit unions over the next two years.

Credit Union Times: Will you again serve on the House Financial Services Committee?

Sherman: Yes. Now that Barney Frank (D-Mass.) has left and Luis Gutierrez (D-Ill.) has taken a leave of absence, I’ll be the #4 Democrat on Financial Services.

CUT: What changes will new Chairman Jeb Hensarling (R-Texas) bring to the Financial Services Committee? Will we see hearings on regulatory relief as some have suggested?

Sherman: I think that he’ll lead the committee in passing bills that repealing parts of the Dodd-Frank Financial Reform Act, but I don’t think that legislation will pass the Senate. So, the practical effect during the next two years will be for the committee to provide some guidance to regulators. I might agree with Jeb on some of that guidance, and some I may disagree with.

CUT: What about Maxine Waters (D-Calif.)? What dynamic will she bring as the new ranking member?

Sherman: Maxine is a very strong progressive with outspoken views; but then again, so was Barney Frank. So I think there may not be as big a change. Obviously, Frank had a knowledge of the issues that is going to be hard for anyone to duplicate. Maxine has focused even more than Barney on minority empowerment, and I expect she’ll bring those issues up.

CUT: Does Basel III and increased capital requirements for banks open the door for supplemental capital legislation for credit unions?

Sherman: I think it gives us one more argument for supplemental capital, but ultimately the reason for supplemental cap and its sister issue, member business lending, is to get funds in the hands of small businesses across the country. When [JP Morgan CEO] Jamie Dimon came before our committee and testified, he said his bank couldn’t find business borrowers here in U.S., so they sent that extra money to London and lost at the roulette table at the hands of that crazy trader. You start with the first question: why weren’t you making biz loans? And that’s what’s being asked of every [financial institution] in the country. The credit union answer is the member business lending cap, and they don’t have easy access to capital as well. So we need both, and the number one thing this economy needs is lending to small business.

CUT: Why don’t banks make more business loans?

Sherman: The answer that will be their favorite is their regulators will be too tough on them, and impose too great a reserve. But there are two answers. At the very top of the very biggest banks, there’s simply nothing exciting that will lead to big bonuses or stock options by making loans to Main Street. The glory and bonuses go to people doing the $10 billion deals. This $6 billion loss in England doesn’t happen in a vacuum; it happens because other crazy traders are making money. For everybody who loses a billion, there’s somebody else who makes a billion. So if your goal is a $5 million bonus and a kajillion stock options, you can’t get there by making a loan to Art’s Deli.

CUT: What is the environment in the House regarding tax reform and the future of the credit union tax exemption? Should credit unions be concerned and be actively lobbying to preserve their tax-free status?

Sherman: In an ordinary year, it would be safe. The credit union tax exemption is always under attack by banks, but this is not an ordinary year. Everybody is looking for a way to say cut to this group because it closes a loophole. Being an old tax lawyer myself, I’ll tell you a loophole is defined as when a crafty tax lawyer creates a loophole for their client that Congress never intended. Congress did intend for credit unions to be tax exempt; it’s hardly a loophole. It makes a lot of sense and the fact is, credit unions use their profits to provide higher rates of interest to depositors and lower costs to borrowers, and Uncle Sam gets his piece of both. For example, when you provide another quarter point on a certificate, that means the member is paying more taxes. I would say this is a year in which things can change for both good and bad, so it’s particularly a year for credit unions to be active in Washington, both in defending tax exemption and seeking an increase to the member business lending cap.

CUT: When do you think Congress will take up tax reform?

Sherman: The staff and members of the House Ways & Means Committee are looking at tax law changes all the time. The staff, that’s what they live for. There’s this false impression that until the TV cameras arrive, Congress isn’t doing anything. Wrong, these things are under discussion all the time, and sometimes the TV cameras come up and capture it.

CUT: In general, how supportive is Congress of credit unions? Did this change at all with the 2012 elections and congressional turnover?

Sherman: Are credit unions popular? Yes? Are they more politically powerful than banks? Sometimes. The credit union tax exemption is popular. Is it more popular than lower corporate tax rates? To Democrats, yes. To Republicans, maybe no. So if credit unions are swimming in a quiet pond, they will always move forward. When they face swift currents in the other direction, sometimes you’ll win and sometimes you don’t.

Congress has changed very little from the election. I think my guess is as to what happens in this Congress, we’re looking at three issues. The least contentious is member business lending, and that’s pretty contentious. Supplemental capital crosses a line and would be more contentious, and tax exemption would be even more contentious than that. I would expect two years from now, we’ll either be talking about how no big change happened, or a medium-sized change. This will not be a year of big change, but the possibility of some change is more present now than it has been in the past. I’m predicting no giant changes, but I’m doing so with less certainty.

CUT: What could credit unions do differently to increase their legislative success?

Sherman: I’d say they’ve done pretty well against some pretty damn powerful folks, so keep doing what you’re doing. Second, galvanize the members. Congressmen are happy to pose for pictures with credit union leaders, knowing those pictures will be in newsletters sent to credit union members. If Jamie Dimon said ‘”take a picture with me and we’ll put it in the bank statement we mail to your home state,” there would not be a long line. Credit unions are popular with members, and getting people and members mobilized is important. As for member business lending, don’t bother trying to get the national chamber involved, because it’s dominated by large banks. Instead, get your local chambers involved. Participate in the roundtable at the luncheon with the printer and the deli owner because they all want another source of member business lending, either to get a better deal or any deal at all. I think mobilizing local small business, first on member business lending and then on supplemental capital, would be the way to go.

CUT: You sound like you’re still enthusiastic about the odds of the member business lending cap being raised.

Sherman: The Chinese symbol for crisis is a combination of symbols for nature and opportunity. While we are still in a period of mild crisis, that symbol might not be giant and red, but it’s bigger than usual and includes both elements – nature and opportunity. So, if ever there was a year to come to Washington and talk to members of Congress, this would be the year to do it.